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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305156050
BuyFind

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305156050

Solutions

Chapter
Section
Chapter 15, Problem 1CQQ
Textbook Problem

A firm is a natural monopoly if it exhibits the following as its output increases:

a. decreasing marginal revenue.

b. increasing marginal cost.

c. decreasing average revenue.

d. decreasing average total cost.

Expert Solution
To determine
The cause of the natural Monopoly.

Answer to Problem 1CQQ

Option ‘d’ is correct.

Explanation of Solution

Option (d):

Natural monopoly exists due to higher cost of production, and an increase in the output will decrease the average total cost. Thus, option ‘d’ is correct.

Option (a):

Under Natural monopoly, firms can control either the price or quantity to increase the sales. If firms increase the price, then there will be a fall in the output leading to a decrease in the marginal revenue. Thus, option ‘a’ is incorrect.

Option (b):

When the large firms maximize its output by increasing their quantity output, then the marginal cost decreases due to the benefits of economies of scale under monopoly. Thus, option ‘b’ is incorrect.

Option (c):

Under Natural monopoly, firms can control either the price or quantity which allows the firm to increase the average revenue by increasing the price. Thus, option ‘c’ is incorrect.

Economics Concept Introduction

Concept introduction:

Monopoly: Monopoly is a market situation where a single firm exists with a large number of buyers without any available substitute.

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Principles of Microeconomics
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